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Active Managers Still Bullish, But Losing Conviction

By

Mark Gongloff

May 27, 2011 1:40 pm ET

SentimenTrader

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Individual investors, unkindly known as the “dumb” money, have headed over the hills and far away from the stock market, while active investment managers, perhaps undeservedly known as the “smart” money, are merely tiptoeing away from it.

That’s the verdict of some new sentiment numbers. The American Association of Individual Investors said yesterday that just 25.6% of moms and pops are still bullish on the stock market, the lowest since last August. And of course last August was the absolute wrong time to be bearish on the market, just ahead of the ripsnorting rally we’re still sort of in.

Meanwhile, the National Assocation of Investment Managers says active managers are still 60% bullish on the market, but cracks are forming in the facade of their bovine attitude, says Jason Goepfert of SentimenTrader.com:

We compute a “confidence” measure which is the standard deviation among responses. The theory is that if managers as a group are confident (either bullish or bearish), then the standard deviation will be small. If they’re less confident in aggregate, then there will be a wide variance in how they are positioned.

The confidence level this week was only 27%. That’s among the lowest in the survey’s 5-year history – in the bottom 7% of all readings.

What does all of this mean? Possibly nothing. Most of the time when NAII bullishness and the market are still fairly high and confidence is low, a smallish rally follows, says Mr. Goepfert. But he warns that the sample size is too small to form any good conclusions. And once, in late December 2007, this precise situation was followed by a 13.2% decline over the next three months.